“Forum Selection Bylaws” Statutorily and Contractually Valid: Shareholders Assented to Not Have to Assent

While the nation was preoccupied with SCOTUS decisiondays, the Delaware Chancery Court upheld the “forum selection bylaws” of FedExand Chevron.  Those clauses in thecorporations’ bylaws provided that litigation relating to the companies’internal affairs should be conducted in Delaware, the state of incorporation ofboth companies.

First, the Chancery Court (Chancellor Strine) held that thebylaws were statutorily valid under the Delaware General Corporation Law (“DGCL”).  Second, the Chancery Court held thatthe bylaws were contractually valid even though they were adopted unilaterallyby the boards of FedEx and Chevron rather than the shareholders of thosecorporations.  The court reasoned(citations and footnotes omitted):

Our corporate law has long rejected the so-called “vestedrights” doctrine. That vested rights view, which the plaintiffs have adopted astheir own, “asserts that boards cannot modify bylaws in a manner that arguablydiminishes or divests pre-existing shareholder rights absent stockholderconsent.” As then-Vice Chancellor, now Justice, Jacobs explained in the Kidsco case,under Delaware law, where a corporation’s articles or bylaws “put all on noticethat the by-laws may be amended at any time, no vested rights can arise thatwould contractually prohibit an amendment.”

In an unbroken line of decisions dating back severalgenerations, our Supreme Court has made clear that the bylaws constitute abinding part of the contract between a Delaware corporation and itsstockholders.  Stockholders are onnotice that, as to those subjects that are subject of regulation by bylaw under8 Del. C. § 109(b), the board itself may act unilaterally to adopt bylawsaddressing those subjects.  Such achange by the board is not extra-contractual simply because the board actsunilaterally; rather it is the kind of change that the overarching statutoryand contractual regime the stockholders buy into explicitly allows the board tomake on its own.  In other words,the Chevron and FedEx stockholders have assented to a contractual frameworkestablished by the DGCL and the certificates of incorporation that explicitlyrecognizes that stockholders will be bound by bylaws adopted unilaterally bytheir boards. Under that clear contractual framework, the stockholders assent to not having to assentto board-adopted bylaws. The plaintiffs’ argument that stockholders mustapprove a forum selection bylaw for it to be contractually binding is aninterpretation that contradicts the plain terms of the contractual frameworkchosen by stockholders who buy stock in Chevron and FedEx. Therefore, whenstockholders have authorized a board to unilaterally adopt bylaws, it followsthat the bylaws are not contractually invalid simply because the board-adoptedbylaw lacks the contemporaneous assent of the stockholders.

The court went on to hold that the forum selection clauseswould be evaluated just as any other forum selection clauses under the standard enunciated bySCOTUS:

In Bremen, the [U.S. Supreme] Court held that forumselection clauses are valid provided that they are “unaffected by fraud, undueinfluence, or overweening bargaining power,” and that the provisions “should beenforced unless enforcement is shown by the resisting party to be“unreasonable.”  In Ingres, ourSupreme Court explicitly adopted this ruling, and held not only that forumselection clauses are presumptively enforceable, but also that such clauses aresubject to as-applied review under Bremen in real-world situations to ensurethat they are not used “unreasonabl[y] and unjust[ly].”  The forum selection bylaws willtherefore be construed like any other contractual forum selection clause and areconsidered presumptively, but not necessarily, situationally enforceable.

Boilermakers Local 154 Retirement Fund v. Chevron Corp., Del.Ch., Civil Action No. 7220-CS, 6/25/13; ICLUB Investment Partnership v.FedEx Corp., Del. Ch., Civil Action No. 7238-CS, 6/25/13.

[Meredith R. Miller]